Microsoft shares fall as slower cloud growth fails to impress Wall Street

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Microsoft has become the latest Silicon Valley giant to be punished by investors amid soaring spending on artificial intelligence, as the company’s shares fell after quarterly earnings failed to meet Wall Street’s high expectations.

The disappointment over double-digit sales and profit growth has highlighted the intense scrutiny on the fast-growing technology and its perceived importance in bolstering the fortunes of Big Tech.

Although sales continue to grow strongly at of Microsoft In its closely watched cloud division, the Seattle-based company said on Tuesday that Azure growth slowed slightly in the three months to June 30 to 29 percent year-on-year, down from 31 percent in the previous quarter. Microsoft said this was partly due to demand for AI outpacing the company’s capacity.

These “capacity constraints” are expected to last through the first half of 2025, CFO Amy Hood said. Azure growth is expected to continue to slow, coming in at 28-29 percent in the current quarter.

Sales in the broader cloud computing business — Microsoft’s biggest revenue driver, which includes Azure cloud computing platform — up 19 percent year over year to $28.5 billion, just short of Wall Street’s forecast of $28.7 billion. The company estimates revenue in the division for the current quarter will be in the range of $28.6 billion to $28.9 billion, below analysts’ forecast of $29.1 billion, according to Refinitiv.

Investors have been closely watching Microsoft’s fortunes as they look to see whether Big Tech can turn the buzz around its new cloud-based AI software into sales and profits. The company’s $13 billion partnership with OpenAIThe startup behind ChatGPT, has put it at the forefront of the race to win customers for its new generative AI services.

Analysts are also screaming signs that huge investments are being funneled into AI Infrastructureincluding data centers and chips, will benefit.

Microsoft’s capital spending jumped nearly 80 percent year over year to $19 billion in the latest quarter. For the entire 2024 fiscal year, the total will reach $55.7 billion, and Microsoft warned that spending will continue to increase next year.

But chief executive Satya Nadella has defended the spending spree, saying it is vital to “seize the opportunity” that AI presents.

Microsoft shares fell as much as 8 percent in after-hours trading before clawing back some of those losses. It dragged down other tech stocks including Amazon and Meta, both of which are due to report earnings later this week.

The correction comes after a strong rally over the past month that has pushed Microsoft’s market value to more than $3 trillion.

The after-hours drop reflected last week’s negative reaction to a double in Google’s capital spending, affecting tech stocks across the sector.

“The expectations have been so high that they’re insurmountable,” said Steve Sosnick, chief investment strategist at Interactive Brokers. “That’s what happens when you become so dependent on big companies with big footprints — and a technology that takes time to translate into net profits.”

AI’s contribution to Azure cloud growth continued to grow in the most recent quarter, the company said, up 8 percentage points from 7 points in the previous quarter and 6 points in the quarter before that. Before Tuesday’s results, analysts at Deutsche Bank had estimated AI would contribute around 8-9 percentage points.

Microsoft has so far not disclosed sales or customer numbers for its flagship AI assistant Copilot, which integrates with its suite of productivity apps and costs $30 per user per month for businesses.

The number of Copilot customers with more than 10,000 “seats,” or individual users, has “doubled quarter-over-quarter,” Nadella said Tuesday.

Microsoft has been grappling with a number of high-profile issues affecting its core software products recently. The Azure outage early Tuesday came just days after a flawed software update from cybersecurity group CrowdStrike left millions of Windows devices around the world unresponsive, causing serious problems for airlines, health care systems, and others.

Total revenue rose 15 percent year over year to $64.7 billion, beating expectations of $64.4 billion. Net income rose 10 percent to $22 billion, beating analysts’ forecasts of $21.8 billion.

Additional reporting by Jennifer Hughes